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Don't Race Out To Buy Watkin Jones Plc (LON:WJG) Just Because It's Going Ex-Dividend

Simply Wall St

Watkin Jones Plc (LON:WJG) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 23rd of January, you won't be eligible to receive this dividend, when it is paid on the 28th of February.

Watkin Jones's next dividend payment will be UK£0.056 per share, on the back of last year when the company paid a total of UK£0.084 to shareholders. Based on the last year's worth of payments, Watkin Jones stock has a trailing yield of around 3.3% on the current share price of £2.55. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Watkin Jones can afford its dividend, and if the dividend could grow.

View our latest analysis for Watkin Jones

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Watkin Jones is paying out an acceptable 53% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Watkin Jones generated enough free cash flow to afford its dividend. Watkin Jones paid out more free cash flow than it generated - 117%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Watkin Jones does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Watkin Jones paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Watkin Jones to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

AIM:WJG Historical Dividend Yield, January 19th 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Watkin Jones's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 57% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Watkin Jones has delivered an average of 33% per year annual increase in its dividend, based on the past four years of dividend payments. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

Final Takeaway

Has Watkin Jones got what it takes to maintain its dividend payments? Watkin Jones had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Watkin Jones.

Ever wonder what the future holds for Watkin Jones? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.